Commercial real estate tends to take a backseat when in a discussion among a group of newbie investors. However, for seasoned investors, commercial real estate business is the safest of all investments.
If you intend to get into commercial real estate business but don’t have any idea on how to start, then here’s a guide we’ve prepared for first-timers like you.
Defining Commercial Real Estate
Commercial real estate refers to real properties intended but not limited to commercial, industrial, educational or medical purposes. It can also include a property used for dwelling but with four or more units.
Investing in real estate can be a bit tricky. You need to do some proper researching before acquiring a commercial real estate to be able to evaluate property its capability for earn you a good return on your investment.
A good research and proper evaluation on a commercial property will help you determine the actual and future value. This can lead you to a tremendous profit later.
Reasons why Residential Property Investors Move on to Commercial Estate Investing
Investors of residential properties gradually level up to commercial real estate when they have more than enough of residential units in their portfolio.
For some good reasons, real estate investors who usually start with selling residential properties find commercial properties more profitable than what they have in their portfolios.
Easy to Manage
Once your portfolio expands to a sizeable quantity, you will find it hard to manage your investment if the majority is tied up to residential properties. If you have more than $20 million worth of residential properties, imagine how many homes and tenants you are going to manage while running your business. On the other hand, this same value will relatively carry less number of commercial properties, therefore, lesser people and properties to manage and supervise.
Diverse Rewards and Risks
Commercial properties include offices, retail shops, a block of shops, warehouse, medical centers, condominiums, health clubs, sports facilities, and much more. Its wide diversity entails varied rewards and risks for each type.
High Yield on Investment
The return on Investment in commercial real estate business is comparatively much higher that residential property business. In a commercial real estate, you can derive your income from rental and appreciation when the property is bought. Because lease contracts are usually long-term and more secured that in residences, the income is more stable and easy to handle.
It is common to have a 10 percent net return for a commercial real estate investment and 7-9 percent for a prime property. The value of the commercial estate is determined by the quality of the rental contract. The value, in general, is determined by the length of the lease contract and quality of tenant.
The value of the commercial property can subsequently drop when there is a vacancy. Some investors even sold their commercial properties at half the price if there is unusual difficulty in encouraging tenants to lease.
Pitfalls in Commercial Property Investment
So far, what proves to be risky in commercial real estate is looking for a new tenant when there is a vacancy. Each tenant has a different need in terms of size, proximity, payment capacity, and use. It is often difficult to find the right tenant.
Due to some reasons, it is also hard to find a buyer for a commercial property. The higher the price, the lesser numbers of buyers for it, not unless some factors can eventually turn out on your favor. An example of this is the construction of a major infrastructure development in the area. In the event that Walt Disney will construct the biggest entertainment center in your place, this is sure to bring flocks of customers in the area where your property is located.
A commercial real estate investment can be less liquid than other investments due to the fact that there are few players in the market. Where there are more potential buyers for residential properties, commercial properties have only a few of them.
Rarely can you sell a commercial real estate property on replacement value. They are generally sold on capitalization rates. This is why it is possible to buy a poorly rented commercial building way far below its market value.
You can also choose to increase the value of your commercial real estate by simply raising the rents while reviewing the rents or renegotiating the terms of a lease contract which is apt for renewal.
Given the proper knowledge in investing, commercial real estate business can, therefore, be more profitable while knowledge is the biggest leverage you can have in amassing wealth.
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